Should we cash in our endowment mortgage early?

Q About 22 years ago, like many people, we were persuaded to take out an endowment mortgage. It was to cover a loan of £60,000, but of course like many of these products it is very unlikely to yield that sum when it matures. When we moved we kept the endowment, but split our mortgage so the amount covered by the endowment was reduced to £40,000 and we borrowed the rest on a repayment basis.

We are now in a position where the amount outstanding on the mortgage is about £38,000 and the endowment is currently worth about £43,000. We are on a base rate mortgage with no early redemption penalties so could surrender the endowment and pay off the mortgage. Our question is, would that be a good idea, or should we stick with the endowment until it matures in March 2013?

The endowment and mortgage payments come to about £450 a month, and with two children at university would be handy. We understand there is also a market for trading endowments – would we be likely to get a better deal if we pursued this option? We realise we would be giving up the life insurance provided by the endowment if we surrender or trade the policy. CL

A If you genuinely can cash in your endowment for £43,000, I would be tempted to go for it and clear your mortgage. However, I suspect the figure of £43,000 is what you are projected to get when the policy matures, rather than its surrender value which is likely to be a lot less. But you can improve on what you get from cashing in early by selling rather than surrendering. You can find out more by contacting the Association of Policy Market Makers.

If surrendering or selling your endowment would produce enough to clear your mortgage, it is still a tempting proposition. Whether it is a wise move depends on whether the difference between the maturity value and the surrender value (or sale price) is greater or less than what it will cost to keep the endowment going to maturity. Assuming there are 16 months to go before it matures, in that time you will pay out £7,200 in mortgage interest and premiums, so the surrender value needs to be at least £35,800 (£43,000 less £7,200) to make cashing in early worthwhile.

As far as the life insurance element goes, it is primarily there to pay off the mortgage should you die before the end of its term. If you clear the mortgage, you also clear the need for life insurance to cover it.